- The loan program
- The length of the loan
- The type of interest rate
Let’s look at each one.
First, Choose a Loan Program
There isn’t one “best” program for every buyer. The goal is to compare the options available to you and choose the one that makes the most sense for your situation.
Conventional Loans
A conventional loan is a mortgage that is not insured or guaranteed by a government agency.
Conventional loans are widely available and may offer:
- A variety of down payment options
- Different loan terms
- Fixed or adjustable interest rates
- The ability to remove private mortgage insurance in certain situations
- Competitive overall costs for well-qualified buyers
If your down payment is less than 20%, the loan may require private mortgage insurance, commonly called PMI. Depending on the loan, PMI may eventually be removed after you meet certain requirements.
A conventional loan may be worth comparing if you have established credit and can meet the lender’s qualifications. However, you shouldn’t assume it will automatically be the least expensive option. The interest rate, mortgage insurance, fees, and total cost all matter.
FHA Loans
FHA loans are offered by private lenders and insured by the Federal Housing Administration.
They may be helpful for buyers who have:
- A smaller amount available upfront
- Lower credit scores
- A shorter or more complicated credit history
- Difficulty qualifying for some conventional loans
FHA loans allow down payments as low as 3.5% for qualified buyers. They also require mortgage insurance, which adds to the cost of the loan.
An FHA loan may provide a path to homeownership when conventional financing isn’t the best fit. It’s important to compare its mortgage insurance and other costs with the alternatives available to you.
VA Loans
VA-backed purchase loans are available to eligible veterans, active-duty service members, and certain surviving spouses.
Depending on the borrower and property, possible benefits include:
- No required down payment
- No monthly private mortgage insurance
- Competitive interest rates and terms
- Limits on certain closing costs
Some borrowers must pay a one-time VA funding fee, although exemptions may apply. You’ll also need a Certificate of Eligibility and must meet the lender’s credit and income requirements.
If you may qualify, ask for a side-by-side comparison between a VA loan and any other programs available to you.
USDA Loans
USDA financing is designed to support homeownership in eligible rural areas. But “rural” doesn’t always mean a remote location or a farm. Some small towns and communities outside larger cities may qualify.
The USDA Single Family Housing Guaranteed Loan Program may offer 100% financing to qualified borrowers. Eligibility depends on factors including:
- The property’s location
- Household income
- The home being used as a primary residence
- The borrower’s ability to repay the loan
- The property meeting program requirements
USDA loans also have program-related fees that should be included when comparing total costs.
If you’re considering a small town or rural community, check the property address rather than assuming the area is or isn’t eligible.
A Quick Comparison
| Loan Program | May Be Worth Exploring If… | Important Tradeoffs to Compare |
|---|---|---|
| Conventional | You meet conventional credit and income guidelines and want flexible options | PMI may apply with a smaller down payment |
| FHA | You have limited upfront funds or credit challenges | Mortgage insurance is required |
| VA | You have eligible military service | A funding fee may apply, and borrower and property requirements must be met |
| USDA | You meet income requirements and are buying in an eligible area | Location and household-income limits apply, along with program fees |
The Home Must Qualify Too
Financing isn’t based only on the buyer. The home must also meet the requirements of the loan program.
Lenders may consider:
- The type and age of the home
- How it is titled
- Whether it is classified as real property
- The foundation and installation
- The appraisal
- Its location
- Whether it will be your primary residence
New Day Homes follows these standards so our factory-built homes can qualify for traditional home financing, subject to the buyer, property, lender, and loan program requirements.
Before selecting any home or homesite, confirm that both work with the financing you plan to use.
Next, Choose a Loan Term
The loan term is the amount of time you have to repay the mortgage.
Two common options are 15-year and 30-year loans.
| Shorter Loan Term | Longer Loan Term |
|---|---|
| Higher monthly principal-and-interest payment | Lower monthly principal-and-interest payment |
| Interest is paid for fewer years | Interest is paid for more years |
| Often has a lower total interest cost | Often has a higher total interest cost |
| Builds equity faster | May provide more room in the monthly budget |
Ask your lender to show you both the monthly payment and estimated total cost for each term you’re considering.
Then, Choose an Interest-Rate Type
Most mortgages have either a fixed or adjustable interest rate.
Fixed-Rate Mortgage
With a fixed-rate mortgage, the interest rate stays the same for the life of the loan.
This means the scheduled principal-and-interest payment remains predictable. The total mortgage payment may still change if taxes, insurance, or other included expenses change.
A fixed rate may appeal to buyers who want long-term stability and plan to remain in the home for many years.
Adjustable-Rate Mortgage
An adjustable-rate mortgage, or ARM, typically begins with a rate that is fixed for an introductory period. After that period, the rate may increase or decrease based on the terms of the loan and changes in its specified index.
An ARM may offer a lower initial rate, but it comes with more uncertainty. Before choosing one, understand:
- How long the initial rate lasts
- How often the rate can change
- How the new rate will be calculated
- How much the rate can change at one time
- The highest rate and payment the loan could reach
An ARM may make sense in certain situations, but it should be evaluated based on the payment you could face after the introductory period—not only the starting payment.
Where Does Down Payment Assistance Fit?
Down payment assistance isn’t a separate type of mortgage. It is help that may be combined with an eligible primary loan.
Depending on the program, assistance may come in the form of:
- A grant
- A forgivable loan
- A deferred-payment loan
- A repayable second mortgage
- Help with closing costs
“Assistance” doesn’t always mean free money. Ask whether it must be repaid, whether interest is charged, and what happens if you sell or refinance the home.
What About First-Time Homebuyer Programs?
First-time homebuyer programs may provide financial assistance, reduced costs, education, or special financing.
And “first-time buyer” doesn’t always mean you’ve never owned a home. Definitions vary by program, and some buyers may qualify if they haven’t owned a primary residence within a specified period.
Instead of assuming you are or aren’t eligible, ask the program or lender to confirm.
Compare the Whole Loan, Not Just the Rate
A lower interest rate doesn’t automatically make one loan the better deal.
When comparing options, look at:
- The interest rate
- Annual percentage rate, or APR
- Required down payment
- Estimated cash needed at closing
- Monthly principal and interest
- Mortgage insurance
- Upfront program or funding fees
- Lender fees and credits
- Whether the rate or payment can change
- Estimated cost over the time you expect to keep the loan
Ask for an official Loan Estimate for each serious option. Using the same purchase price and down payment makes it easier to compare the loans accurately.
Questions to Ask Your Lender
You don’t need to know which loan you want before the conversation. Bring these questions instead:
- Which loan programs could I qualify for?
- Why might you recommend one over another?
- Can you show me more than one option?
- How much would I need at closing for each?
- Does the loan include mortgage insurance or a funding fee?
- How long will those costs continue?
- Is the interest rate fixed or adjustable?
- Does the home I’m considering meet the program’s property requirements?
- Are there assistance programs I should explore?
- What would each option cost over the time I expect to own the home?
A good lender should be able to explain the answers in language you understand.
Start With Your Options—Not Assumptions
They can help you compare the programs you may qualify for, understand the tradeoffs, and review the numbers side by side. Our preferred lenders may also offer special discounts or incentives to New Day Homes customers.
Begin by completing our Path Home Assessment. We’ll learn more about your goals and help connect you with the preferred lender who may be the best fit for your needs.
The Right Loan Is the One That Fits
Understand the program. Compare the costs. Ask about the tradeoffs. Make sure the home qualifies.
You don’t have to master every mortgage term. You just need enough information to recognize your options and ask the right questions.